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Thursday, 14 November 2019

Weekend Reading - Some interesting stuff

1) The economic future of negative interest rates
A great article on how negative interest rates are affecting global economy.
Denmark was the first country to adopt negative interest rates (July 2012), but it was Japan, which had been wrestling with the fallout from the twin forces of an aging population and a credit bubble since 1989, that became the petri dish in which financial alchemy was tested. Quantitative and Qualitative Easing (QQE) followed, allowing the Bank of Japan (BoJ) to buy corporate bonds and even equities. Negative–interest rate policy followed in January 2016.
For finance ministries, zero interest rates on government bonds are a blessing and a curse. For the first time in history, they can raise capital for nothing or even receive an interest payment for their trouble. 
The effect that an artificially low interest rate has on an economy is pernicious. Asset markets are supported, and it raises the point at which they clear, but it also reduces the need for companies to improve internal efficiency. For corporates, borrowing becomes preferable to issuing equity. Firms become more leveraged. The managers of these businesses have an incentive to improve profitability per share by issuing debt and retiring equity capital. They are deterred from raising new capital for other purposes; stock buybacks are safer than speculative projects, especially when you cannot divine what discount rate to use in order to assess the potential of a project.

2) Shopify is fighting Amazon! And doing a good job!
Anyone who has been following my weekend reads would know that I follow Amazon very closely. So, found this article very insightful.
Shopify’s ascent corresponds to the rise of direct-to-consumer brands, and the shift of [small businesses] to online storefronts. Stores want to maintain a direct relationship with their customers; they want to create unique branding experiences versus shipping Amazon-cloaked boxes; and businesses worry that Amazon will one day create lower-priced knockoffs of their products.
Last month, Shopify took another big step toward becoming a viable alternative to Amazon. It unveiled the Shopify Fulfillment Network, which will give merchants the ability to offer timely deliveries under their own branding, along with affordable shipping rates.

3) Aha! Cola-Cola's new product!
At a time when consumers are increasingly looking for healthier alternatives to sugary soft drinks, AHA won't have calories or sodium. But its citrus and green tea, and black cherry and coffee flavor combinations will contain 30 mg of caffeine.
Coca-Cola mixed and matched 50 pairs of flavors before coming up with the eight that will be on store shelves. They include orange and grapefruit, blueberry and pomegranate, and peach and honey.

4) Screen time slows down cognitive development in children
The scans revealed that kids who spent more time in front of screens had what the authors call lower “white matter integrity.” White matter can be roughly thought of as the brain’s internal communications network. The integrity of that structure is associated with cognitive function, and it develops as kids learn language. There’s a clear link between higher screen use and lower white matter integrity in the children. That structural change appears to be reflected in the results of the cognitive test the kids took as well, which showed high screen time associated with lower levels of language and literacy skills. 

5) Goa village to charge tourists for clicking photos. [I wish they did this for selfies!! :-) ]
Tourists visiting North Goa's Parra village will now be charged for taking photographs of its picturesque landscape. Parra Village, which is the birth place of late Goa Chief Minister Manohar Parrikar, has introduced 'Swachhta tax' for the tourists. The fee for clicking pictures of Parra's landscape ranges from Rs 100 to Rs 500.
The incumbent sarpanch of Parra village, Delilah Lobo said the tourists create a mess on the coconut-lined road. Levying tax would cut town nuisance created by tourists in the village. "Indian mentality only understands fines. Therefore we have imposed a fine to cut down on this nuisance caused by tourists," Lobo added.

Thoughts on the auto industry slowdown - 12 Sep 2019

Shared Some Thoughts on ET Now.


Friday, 8 November 2019

The Quality Conundrum

This note is more to myself and for other small investors. Last few years, I have had the opportunity to interact with a very large number of small investors and have seen first hand atleast a thousand different portfolios. This note is more to reassert to me the importance of looking for quality first and price thereafter.

People are deriding quality companies and saying that quality is in a bubble.

But let’s take a step back and ask what is quality? Is it defined only by high PE stocks? Does quality exist in midcaps and small caps or is only large/mega-cap companies’ quality? Can quality exist in companies whose stocks are cheap? Are all expensive stocks good quality businesses?

Secondly, why is there a premium to perceived quality companies today? Or conversely, why have small & mid-cap stocks corrected so much? Are they all poor quality?

Some of the reasons that I think of are as follows:
  • Failure of companies, including in large and famous corporates – Zee, NCLT cases
  • Governance deficit in large well-known companies – Infosys whistle-blower, Yes Bank, DHFL
  • Frauds and other issues – PNB, PMC Bank, IIFL
  • Lack of ready information about small and mid-cap companies
  • Midcaps & smallcaps had rallied to obscene valuations by 2017
  • Weakness in the economy impacts the smaller companies slightly more than the larger ones

Investors are scared. Return of capital has taken precedence over return on capital. That is why stocks of companies which investors think are safe is at a premium. And everything else is relatively cheap.

Now, let me look at over-pricing. A lot of companies are at very high PE multiple. Though I am not a very strong believer in looking at PE in isolation, it does help in understanding the overall market sentiment when used as a collective. I had tweeted a couple of days back about people talking about high PE are ignoring the interest rate reduction. All things equal, if you reduce interest rates from 12% to say 6%, the fair value that a DCF will throw up is about 4 times. Now, you might argue that if interest rates fall, all other things can’t remain equal. Fair point. So, lets discount that 4x to 3x. Heck, let's reduce it some more, say 2x or 1.5x. The broad point I am making is that the median PE of stocks as a whole rise. And we have seen this play out in real life as well. The NIFTY PE, for example, has moved up from 16-17 a few years back to now about 26-27.

Now think from this angle, 10 years back, people were ready to pay a 2.5-3x premium on median PE for the so-called high-quality companies. Now, my contention is that that multiple for perceived quality will not change. Even now investors would pay a similar markup. So, a high-quality company used to be available at 30-40 PE when the market was at 15-16PE. How has that ratio changed now? It is more or less the same.

I am for sure not making a case for buying a stock with very high multiples or which is expensive based on its future earnings. But I do have a problem when people are saying that quality is expensive, what remains unsaid is “therefore move to cheaper, poorer quality businesses”.

Perhaps the most important thing is for those who can identify great companies at cheap prices, then they should do precisely that. But a vast majority of people can’t do that and end up buying mediocre or poor companies just because they fixate on cheapness.

In my personal experience, retail investors are much much better off being in quality companies with longevity than poorer companies which can cause permanent capital damage. If you can find equally great kind of companies at cheaper prices, then it is a no-brainer and no need to discuss at all.

So, the next question is what happens next? I don’t know. My take is this phenomenon will also mean revert. It may take some time, but it surely will. We are going through a massive exercise of cleaning up corporate India and also a sort of formalisation of the economy. As the good quality smaller companies come up on governance as well as consistency of results, the premium for others will reduce. People will then not take refuge in only a handful of stocks. 

Are there bubble-like valuations there today? Sure, a lot of stocks to me definitely feel that way. But like any phase, this phase of over-valued quality stocks will also change facilitating a more broad-based rally.

I am, like always, trying to find good quality companies which are cheap based on their earning potential. But quality comes as the first filter and cheapness next. I am willing to compromise on cheapness but not on the quality of the business. Because history and my personal experience tell me that buying and sticking to good quality does not hurt. 

Another example of holding on to quality that most people often cite is HUL’s flat returns for 10 years. Trust me, I was there. I bought and finally sold HUL at about the same price after a decade. Now, as a retail investor, the way I look at it is this. 
  • I did not only have HUL in my portfolio, but there were also other stocks which did much better (or worse). 
  • I kept getting good dividends and also a good debenture, 
  • I did not lose money. I know a lot of people who put money in JP Associates, DLF, Unitech and other similar companies and lost 40-50% or more during the same period, 
  • If I had put a basket of 10 such strong business companies, I would actually have done quite well. I actually did this exercise much later after found that even well discovered fundamentally sound strong businesses have given exceptionally good CAGR returns over 20-25-year periods.

Another very important point to remember is that we invest in a portfolio of stocks. Peter Lynch, one of the most successful money managers, had different categories of stocks in his portfolio – slow growers, stalwarts, fast growers, asset plays, turnarounds and cyclicals. So, in a diversified portfolio is not about having only one or two categories of stocks but a mix of different types of stocks.

Another point that is missed in this discussion is the time horizon. For fund managers and advisors, usually, the time horizon is a problem because they get “judged” by the returns in the short term. And quite a few times, what is good in the short term ends up being harmful in the long term. Individual investors can and should have much longer time horizons. As a retail small investor, you don’t need to do anything all the time. If you are in the market for the next 20-30-40 years, you are much better off with a collection of great businesses than trying to get in and out of iffy companies because they are cheap by some arbitrary parameter. For example, one approach to this is to just pick 9-10 industries you like and which have long term growth characteristics and pick either the best or two best companies in that industry and build a portfolio. And then do nothing. Re-look at the portfolio once every year. If you think the businesses are doing well in their respective industry, again, do nothing. After 10 years, you are likely to end up much better than most people who are trying to get in and out of stocks and markets by giving the flavour-of-the-month reasons.

Bottom line, if you are a small investor, and do not know how to pick great stocks, then you are better of building a basket of strong businesses, focusing on quality first and price second (but don’t ignore price altogether), have a long investing time horizon and follow the business cycle. 

Happy investing.

Friday, 1 November 2019

Weekly Reading - Some Interesting Stuff

1) Target fights back against Amazon, and wins!
In March 2017, Target made a huge announcement: It planned to invest over $7 billion in a turnaround strategy that would include:
 - remodeling existing stores (and opening smaller ones in urban areas);
 - introducing new, private label brands; and,
 - enhancing its digital shopping experience.
Wall Street thought the plan was a disaster. On the day of the announcement, Target suffered its largest stock plunge in almost a decade.
But fast-forward to today, and Target is thriving. First-quarter results for 2019 beat analysts' expectations. The store's private-label lines are exploding. And as comparable store sales continue to rise, the stock price is trading at an all-time high.

2) Using Sequential Market Identification for identifying stocks
In 1977, we financed Apple… It was an era where knowing about microprocessors made the evolution of the PC obvious. Steve Jobs was an employee at Atari in its early days. So I had the advantage of all that knowledge before anybody else.”
It became very apparent that Apple needed a different memory system. So Sequoia financed a guy by the name of Jugi Tandon to go into a small five-inch disk drive business. That decision was clearly driven by an application need in the PC which required a solution that was faster, far more reliable, and had greater density than an audiocassette. So we financed Tandon. And it was a spectacular investment.” Tandon became a pioneering company in the PC disk drive industry.
In 1987 we started the internetworking industry with Cisco. We had previously invested in 3Com and other similar companies, so we understood the connection of the Internet, and all that it encompassed, probably better than most people. So we were looking for Cisco when they were looking for us. That is how we prefer to invest, in an anticipatory way.
The identification of Ethernet and Internet infrastructure, specifically routers, were the third and fourth successful applications of the the Sequential Market Identification Model. 

3) The skill of managing luck
Algorithms are often much better at many decision tasks than humans. Yet, research shows we’re more likely to choose a human forecaster than an algorithm. And it’s ever worse when we see how an algorithm performs, especially if it occasionally makes a wrong call. This is called algorithm aversion.
epitomize the skill of managing luck: they’re never certain, but constantly improving the odds.
That’s boring! It’s not memorable or exciting. You don’t root for an algorithm. They never surprise you on the upside. They’re never a hero, defying the odds. They don’t ‘try hard’. They don’t offer a narrative.

4) What is happening in Venezuela?
Consumer prices have skyrocketed, and the International Monetary Fund expects the inflation rate to reach 10 million percent in 2019, which would be one of the worst cases of hyperinflation in modern history.
Violence and hunger are widespread. Food shortages have reached new highs in recent months, and 80 percent of Venezuelan households don’t have sufficient access to food, according to monitoring groups. Grocery store shelves are bare. Hospitals struggle to treat severely malnourished children.
The country’s public health system has collapsed, leaving many without access to lifesaving medicine. The rates of several preventable diseases have risen.
The migration of Venezuelans out of the country has reached levels not seen before in modern history. More than three million people have left since 2014

5) Why don't rich people stop working?
Studies over the years have indicated that the rich, unlike the leisured gentry of old, tend to work longer hours and spend less time socializing. And they continue to diversify. Many of these people have been navigating work and life in sixth gear for decades. Once they have no financial need to work they have trouble shifting into lower gears.

Friday, 25 October 2019

Weekly Reading - Some Interesting Stuff

1) Studying English may be a better career option than science / engineering
There’s no denying that the typical computer science major makes more money shortly after graduation than the typical English major.
Contrary to popular belief, English majors ages 25 to 29 had a lower unemployment rate in 2017 than math and computer science majors.
That early STEM pay premium also fades quickly, according to research from Harvard. After about a decade, STEM majors start exiting their job fields as their skills are no longer the latest and greatest. In contrast, many humanities majors work their way to high-earning management positions. By middle age, average pay looks very similar across many majors.

2) Amazon starts making private label alcohol
Amazon is adding to its own-label product line with its first spirit brand in the U.K. called Tovess Gin. Amazon has been expanding its own range of goods, listed under “Our Brands”, which are created by Amazon or its partners and sold exclusively on the site. These benefit Amazon by offering better margins and can be used to help persuade big brands to cut prices. Tovess gin is the only alcohol product listed as an Amazon brand on the U.K. site, while other groceries include Amazon Brand Solimo coffee capsules, Presto! kitchen rolls and Happy Belly dried fruit and nuts.

3) McDonalds is using ML and AI to make you order more
The chain has digital boards programmed to market that food more strategically, taking into account such factors as the time of day, the weather, the popularity of certain menu items and the length of the wait. On a hot afternoon, for example, the board might promote soda rather than coffee. At the conclusion of every transaction, screens now display a list of recommendations, nudging customers to order more.
At some drive-throughs, McDonald’s has tested technology that can recognize license-plate numbers, allowing the company to tailor a list of suggested purchases to a customer’s previous orders, as long as the person agrees to sign away the data.
In March, McDonald’s spent more than $300 million to buy Dynamic Yield, the Tel Aviv-based company that developed the artificial intelligence tools now used at thousands of McDonald’s drive-throughs.
The deal “has changed the way the high-tech industry thinks about potential M&A,” said Liad Agmon, a former Israeli intelligence official who co-founded Dynamic Yield. “We’ll see more nontraditional tech companies buying tech companies as an accelerator for their digital efforts. It was genius on McDonald’s side.”

4) When Peter Lynch speaks, we listen
On the way to work, the amount of bad news you could hear is almost infinite now. So the question is: Can you take that? Do you really have faith that 10 years, 20 years, 30 years from now common stocks are the place to be. If you believe in that, you should have some money in equity funds.
It's a question of what's your tolerance for pain. There will still be declines. It might be tomorrow. It might be a year from now. Who knows when it's going to happen? The question is: Are you ready—do you have the stomach for this?
More people have lost money waiting for corrections and anticipating corrections than in the actual corrections. I mean, trying to predict market highs and lows is not productive.

5) Nike goes hi-tech, gets a tech CEO for itself
Donahoe is currently the CEO of ServiceNow, a provider of cloud-computing services for global businesses. Prior to that, he served as CEO of eBay from 2008 to 2015, and also did a stint as CEO and managing director of the management consultancy Bain & Co. He may not sound like the most obvious choice to succeed Parker, who started at the company as a footwear designer and has deep knowledge and experience in sneakers. What Donahoe does understand is technology, something Nike has been investing in heavily. Last year it acquired the data-analytics firm Zodiac. This year it bought Celect, a company specializing in predictive analytics.

Thursday, 17 October 2019

Weekly Reading: Some Interesting Stuff

1) The new marathon record, which was not a marathon!!
Like the moon landing, Kipchoge’s run was a technical achievement that required unprecedented planning and support. In fact, it was so heavily engineered that his new time will not count as a world record. Kipchoge ran the fastest time ever over the marathon distance, but for heated reasons that get at the heart of the sport, he did not run a marathon.
To sustain this blistering pace, Kipchoge ran under conditions that had been painstakingly and exclusively arranged to push him beyond the two-hour barrier. 
Challenge was not a race by any strict definition: It was simply Kipchoge, joined by a rotating phalanx of pacesetters, rocketing along the pavement against the clock.

2) We are nearing the endgame for PE funded non-businesses burning cash
Consumer tech companies, along with their venture-capital backers, help fund the daily habits of their disproportionately young and urban user base. 
But this was never going to last forever. WeWork’s disastrous IPO attempt has triggered reverberations across the industry. The theme of consumer tech has shifted from magic to margins. Venture capitalists and start-up founders alike have re-embraced an old mantra: Profits matter.
And higher profits can only mean one thing: Urban lifestyles are about to get more expensive.

3) Facing unbearable heat, Qatar has begun to air-condition the outdoors
Qatar is one of the fastest warming areas of the world, at least outside of the Arctic. Changes there can help give us a sense of what the rest of the world can expect if we do not take action to reduce our greenhouse gas emissions.
To survive the summer heat, Qatar not only air-conditions its soccer stadiums, but also the outdoors — in markets, along sidewalks, even at outdoor malls so people can window shop with a cool breeze. “If you turn off air conditioners, it will be unbearable. You cannot function effectively,” says Yousef al-Horr, founder of the Gulf Organization for Research and Development.
Yet outdoor air conditioning is part of a vicious cycle. Carbon emissions create global warming, which creates the desire for air conditioning, which creates the need for burning fuels that emit more carbon dioxide. In Qatar, total cooling capacity is expected to nearly double from 2016 to 2030, according to the International District Cooling & Heating Conference.
And it’s going to get hotter.

4) Afternoon siesta is good for you (now I am guilt-free!!)
There is evidence to suggest that normal sleep does not consist of one block of 7 1⁄2 hours during the night. It is more likely that our biology is designed to allow us to sleep for about 6 hours during the night and 1 1⁄2 hours during the day.  Sleeping just once in 24 hours is called monophasic sleep, whereas broken sleep is polyphasic. In evolutionary terms, polyphasic animals are the most common, whereas monophasic animals have evolved more recently. Polyphasic patterns of sleep are the most common.
In an ideal biological world, napping (polyphasic) sleep might be best, as the body is never unduly stressed.

5) The US military is trying to read minds
The goal is to eventually develop accurate and sensitive brain-computer interfaces that can be put on and taken off like a helmet or headband—no surgery required.
Human skulls are less than a centimeter thick: the exact thickness varies from person to person and place to place. They act as a blurring filter that diffuses waveforms, be they electrical currents, light, or sound. Neurons in the brain can be as small as a few thousandths of a millimeter in diameter and generate electrical impulses as weak as a twentieth of a volt.